Textiles 2008: Blueprint For Survival

January 24, 2008

D on’t sell the new year short. True, combined producer shipments of textiles and apparel
will drop another 3 to 4 percent to near $95 billion, but that’s not all that bad considering
today’s fierce import competition and the much bigger declines of recent years. Even more
encouraging: Industry profits and margins should continue to hold up tolerably well.

On the last point, more and more domestic firms are increasingly emphasizing this global
aspect of their operations. Their goal: total supply chain integration – a concept that combines
their own facilities and expertise with those of partners around the world.

All this is not to say the textile and apparel industries won’t continue to deal with more
than their fair share of headaches. Indeed, aside from questions on how the economy will fare over
the new year, major trade questions remain unanswered.

On the latter score, the slow creep-up of the Chinese currency relative to the US dollar
hasn’t proved nearly enough to stem imports from that country. Witness, for example, the big
17-percent jump in incoming Chinese textile and apparel shipments over the past year – a gain that
leaves Beijing accounting for 40 percent of the United States’ total textile and apparel imports.

On a somewhat more upbeat note, however, there now seems to be some hope the Chinese import
onslaught can be slowed down a bit. This is based on both gradually rising Chinese production costs
and increasing pressure for quicker remedial actions as the deadline for the expiration of
remaining quota curbs approaches.

Nor is China the industry’s only big question mark. Also complicating the outlook over the
next year or so are such factors as new challenges from other foreign producers, changing
international ground rules, ever-shifting consumer tastes, and the need for continuing capital
investment to keep domestic mills and factories competitive in today’s dog-eat-dog marketplace.

Export trends are also far from clear. For one, it’s still uncertain how much of a role our
weakening dollar will have in sparking outgoing shipments both to China and elsewhere. As of now,
for example, many non-textile/apparel export areas have begun to pick up due to the dollar’s
decline – and the expectation is that similar export gains may well also begin to show up in both
textiles and apparel over the coming year.

Last, but not least, the US macro-economic picture also has to be factored into the 2008
forecast equation. As of now, for example, there is some real concern about how the overall US
economy will fare as the housing slump and sky-high gas prices combine to dampen demand. But the
last fear seems somewhat overdone. The consensus of most business analysts – and one to whichTextile World also subscribes – is that new government pump priming moves will prevent a major downturn and
even make for some modest pickup as the year draws to a close.

That’s hardly nirvana. But it should be enough to keep domestic buying of textiles and
apparel on a relatively even keel.

To sum up, calling detailed product-by-product trends with pinpoint precision isn’t going to
be any slam dunk. On the other hand,TW feels there already are enough clues available to guarantee against any significant slippage.
In any event, both the textile and apparel sectors should remain not only profitable, but also
world-class – with key industry parameters shaping up something along the following lines.

Domestic Demand: Aggregate textile mill shipments are expected to slip about 3.5
percent over the new year to around $66 billion. But the decline could be relatively uneven. Thus,
a somewhat larger-than-average 5-percent drop is anticipated in the rug and carpet sector,
reflecting the recent sharp drop in housing activity.

It might also be pointed out that the mill product sector should become more important in
the overall domestic textile mix. Today, this subgroup accounts for roughly the same amount of
shipment dollars as does the basic mill category. Contrast this to a decade ago, when shipments of
these more highly fabricated products came to just a little over half of those reported for basic
mill items.

Traveling further downstream, apparel shipments are targeted to fall by about another 5
percent or so, primarily because of continuing import penetration. Best bet here: a shipment total
of around $29.5 billion. While this slippage is a lot less steep than some of the double-digit
declines of recent years, it makes for a much more compact industry, with apparel sales running
only about half of the $60 billion level prevailing as recently as 2000.

Supply: No sweat as far as availability is concerned – given the combination of
more than ample domestic mill capacity, continuing domestic investment and the increasing number of
international suppliers seeking to break into the market.

On the domestic front,TW expects mills to operate at only around 70 percent of capacity. That’s quite low when
compared to the 80-percent and higher levels prevailing through the 1990s. To be sure, inventories,
as measured by days’ supply on hand, will remain relatively low when compared to earlier years. But
that should not create any real problems, as vastly improved inventory management and forecasting
assure speedy deliveries in markets that are increasingly subject to sudden and sometimes
unexpected style or other demand shifts.

Nor is availability likely to prevent any roadblocks as far as overseas procurement is
concerned. One reason: increasing foreign capacity – reflecting the fact that more and more
countries are moving to challenge China for lucrative US and European markets. This global
production buildup is pretty much across the board, and covers basic fibers and fabrics as well as
final consumer product lines like apparel and carpets. Moreover, these foreign firms are
increasingly following the lead of domestic mills and manufacturers developing their own
sophisticated strategies to speed up deliveries.

Prices: Global competition in conjunction with only limited cost increases should
continue to put a damper on any significant price advances. To be sure, there will continue to be
selective hikes. But overall, they won’t amount to all that much – with Uncle Sam’s all-inclusive
textile/apparel price index expected to increase only about 1 to 2 percent in 2008 – not that much
different from the 1-percent boost noted over this past year. Nor does this price picture look any
different when textiles and apparel are viewed separately. Reason: the equally strong competitive
pressures that continue to prevail in both sectors.

On the other hand, some conflicting price trends seem to be appearing in textile imports.
Thus, while incoming shipments of basic mill lines have remained virtually unchanged over the past
12 months, some fair-sized price hikes have cropped up in imports of mill products. And this
pattern is expected to continue into the new year.

Carpets and rugs are yet another area where price hikes have tended to differ from the
overall textile and apparel average. This sector, hit by the current housing slump, has shown
little or no advance over the past six months – again with all signs indicating this basically flat
pattern will persist into 2008. It’s all a bit different from the experience of the past decade,
when carpet and rug price averages managed to advance at a relatively steady 1.5-percent annual
rate.

Costs: As indicated earlier, mill production expenses should not present any
serious problems. On the labor front, for instance, hourly pay hikes continue at a relatively
modest 3-percent annual pace. And even this pressure is being offset by efficiency gains of roughly
the same magnitude. Implication: Unit labor costs are remaining relatively flat. More important,
few near-term changes in this key industry barometer are currently anticipated.

Basic fiber cost trends are manageable, too. True, some advances are likely in coming
months, but any increases that do occur are likely to be on the modest side. Looking at average
man-made quotes first: At last report, they were pretty much where they were last year at this time
– quite a surprise given the big jump in their key petroleum feedstocks over the same 12-month
period. To be sure, some of this feedstock increase will eventually be passed along. On the other
hand, competition engendered by ample or more-than-ample capacity should hold any hikes to
tolerable proportions.

This man-made supply excess is confirmed by recent estimates made by Fiber Organon, which
puts global man-made fiber output at only 75 percent of its potential. Much of this can be traced
to Asian overexpansion – particularly in China, where capacity additions have been outpacing demand
by a large portion, to the point where that nation now accounts for more than 50 percent of world
man-made fiber production.

The situation in cotton, meantime, is somewhat different, with global consumption now
outpacing production. The latest estimates supplied by the US Department of Agriculture put global
consumption for the 2007-08 marketing year at 129.2 million bales – up 5.9 million bales, or 4.8
percent, from this past year’s figures. On the other hand, new cotton production is not likely to
match this. Specifically, the 2007-08 total is estimated at only 119.4 million bales – nearly 10
million under projected consumption.

Upshot: End-of-year world stocks are expected to drop another 6 million bales. That’s enough
to reduce the bellwether stocks/use ratio to 42.4 percent – well under the 49.3 reading of 2006-07.
Nevertheless, there should be enough cotton to go around – in part because of an improved US
domestic supply. The ending US stocks/use ratio is expected to rise. Even so, the increase isn’t
likely to be enough to create any overall global cotton market weakness. Hence, a prediction from
Cary, N.C.-based Cotton Incorporated that cotton tabs are likely to remain firm to higher well into
the new year.

Employment: Here, the trend is emphatically downward. Part, of course, reflects the
continuing shrinkage in mill production. But equally important are the industry’s efficiency gains
alluded to above – gains that allow each worker to turn out more product each hour.

Take 2007 as an example. Overall textile mill output is estimated to have slipped another 6
percent. Add in productivity gains, which ran in the 3-percent range, and it should come as no
surprise that mill employment dropped to 329,000 – far under the previous year’s reading.

There’s also little to suggest any change over the next 12 months.TW equations point to another sizeable worker decline – probably something in the 5-percent
range. Viewed from another perspective, the coming year’s estimated 312,000 industry workforce
means that the number of textile workers will have been halved in just 10 years. And the situation
is even more dramatic in the downstream apparel sector. This year, the domestic clothing industry
will be lucky to employ 200,000 workers. That’s less than one-third the number prevailing just a
decade earlier.

Profits: Happily, there’s a brighter side to the above-noted productivity factor
that has been helping drag down employment totals. The fact that it has helped keep labor costs
under control has been a plus in earnings; and when you couple this with an increasing number of
production, distribution, marketing and management innovations, it helps explain why mill profits
have been holding up as well as they have.

This past year, for example, both earnings and margins, while slipping slightly, were still
at respectable levels. Indeed, overall 2007 after-tax dollar earnings were still running far above
levels prevailing as recently as 2004. And the same is true of after-tax margins.

As for the new year,TW anticipates little overall bottom-line change. To be sure, still-sliding industry activity
will be somewhat of a drag. But offsetting this will be continuing effective cost controls and
hopefully steady to slightly firmer prices. As for the actual numbers: Look for net profits to run
around $1.3 billion. Margins are expected to follow a similar pattern, with returns on sales and
stockholder equity running at near 3 percent and 8 to 9 percent, respectively. Not great, but not
all that bad, either.

International Trade: This past year’s surprisingly small 2.5-percent increase in
overall textile and apparel imports on a square-meter-equivalents (sme) basis bodes well for the
year just getting underway. Given the combination of intensifying government pressures to stem the
incoming shipment tide and somewhat less impressive consumer income gains,TW would expect nothing more than a repeat of last year. Again, that would be a lot better than
double-digit increases recorded as recently as 2005.

The US industry’s export totals, meantime, should begin to pick up a bit – thanks to the
weak dollar, which, other things being equal, generally tends to result in lower prices for our
foreign customers.TW ‘s prediction here – about a 2-percent gain.

But despite this improved export picture, the textile-apparel trade deficit is likely to
continue growing. That’s because import gains, though quite modest by past standards, are weighted
far more heavily than the United States’ basically small export totals. Best bet here – about a
3-percent trade deficit increase. That’s a lot less than the big 5- and 7-percent advances racked
up in 2006 and 2007, respectively.

A Longer Look Ahead

All the above forecasts are only focusing on the year that’s just now getting underway. But
some thoughts on what’s likely to be happening through the remainder of the decade and even into
the next one would seem to be in order. To get some answers on this,TW went to Boston-based economic consulting firm Global Insight. Its projections over the
upcoming period were for the most part quite reassuring.

On the demand front, for instance, future declines are expected to remain quite modest.
Thus, the average annual slippage in revenue, corrected for inflation, over the next three years is
put at only near 4 percent for textiles and 6 percent for apparel.

Moreover, go beyond this and look at the subsequent four years — 2011-14 — and the declines
in overall textile mill activity should begin to slow down, with average revenues of this latter
period slipping only 2 percent annually. And, if you zero in on more highly fabricated mill
products, the declines become even smaller.

Global Insight analysts are also relatively upbeat when it comes to bottom-line performance.
Its long-term estimates for what it calls “margins” — sales less raw material and labor costs —
suggest little more than small 1- to 2-percent annual declines.

Chinese Question Marks

It should also be pointed out that not all ofTW ’s predictions can be made with equal confidence. This is especially true when it comes to
trade, where more than average uncertainty exists when it comes to future Beijing and Washington
moves to level the international playing field.

Clearly, the United States’ current overall trade deficit — up significantly again over the
past year — cannot be sustained. There are many ways to change this situation — the most notable of
which is more upward valuation of the Chinese yuan. To be sure, there has already been some modest
progress on this score — with the yuan jumping 12 percent vis-à-vis the dollar since mid-2005 — 5
percent of which occurred during 2007. This actually may be of some help inasmuch as a weaker
dollar makes Chinese products more expensive and US exports to that nation cheaper. Unfortunately,
the change so far has not been nearly enough help. Most economists, for example, feel a 25- to
30-percent revaluation is probably needed to bring things back into balance.

The big question, of course, is how long it will take to reach such an equilibrium. Right
now, the pressure is on Beijing. And the pressure is not only emanating from Washington. A lot is
also now coming from the “Gang of Seven” industrialized nations, which is also pressing the Chinese
a lot harder to let its currency rise more rapidly.

Bottom line: Some further yuan appreciation now seems pretty much assured. But how much, and
how fast this will occur is still anybody’s guess.

Moreover, exchange rates aren’t the only things up in the air. Washington has other trade
options, too. The Department of Commerce recently announced it will use its anti-subsidy
countervailing duty laws to stop the entry of paper products from China. This, in turn, has
prompted textile officials to think about pressing for similar options against subsidized textile
and apparel imports.

There are also, as noted earlier, some question marks on what happens when existing quotas
on imports expire at the end of the current year. Ditto on the possible trade impact of currently
rising Chinese production costs. This latter development could well become an important factor as
time goes by. Labor tabs, for example, in some areas of that country are now reportedly rising at
double-digit rates. Moreover, companies are beginning to incur huge expenses to fight pollution,
which has fast become a major issue.

This pollution factor, incidentally, is particularly acute in textiles, which is now one of
Beijing’s dirtiest industries. In addition to containing heavy metals and various carcinogens,
fabric dyes may contain high levels of organic materials that contain starch — the breakdown of
which can suck all the oxygen out of a river, killing fish and turning the water into a stagnant
sludge.

Other things being equal, all of the above-noted cost pressures suggest higher
Chinese-producer asking prices. Indeed, the average price of the incoming shipments of all Chinese
products has already begun to inch up — with a percentage point or two being added to the average
quote over each of the past few quarters.

Eventually, this is all bound to impact the overall volume of imports from that country. But
just how much an impact and exactly when still remain to be seen.

And in many instances, green, eco-friendly products are spearheading the movement — with the
trend here extending all the way from fibers to the finished product.

Credit this increasing interest to a growing consumer desire for these eco-sensitive
offerings. Backing this up, a recent survey by the Port Washington, N.Y.-based NPD Group — a global
provider of consumer and retail market research information — found interest in buying organic
fashion products tripling in the two-year period ending in 2006. These findings also are confirmed
by Cotton Incorporated. Its recent survey on this subject found that more than half of buyers
expend at least some effort in searching out eco-friendly clothing.

One thing is for sure, there seems to be a burst of these green products in the fiber
sector. Bamboo, for example, is becoming a name to reckon with. Using a process similar to the one
that transforms wood pulp into rayon, it is changed into a silky fiber that is highly absorbent,
breathable and antibacterial. Bamboo end-uses include outerwear, T-shirts, underwear, hosiery,
towels, denim, sheets and other home furnishings.

Another sign of the times: China, the largest bamboo producer, has increased its exports of
this commodity ten-fold over the 2004-06 period.

Nor is bamboo the only new fiber attracting industry attention. New ways also are being
developed to make textiles out of such materials as rice straw, corn husks, soybeans and seaweed.
Even hemp is joining the parade, with this fiber helping to make clothes more durable and
breathable.

Moreover, the higher costs of these products don’t seem to be any significant deterrent.
NPD, for example, estimates that well-heeled consumers are willing to pay as much as 24-percent
more for these new types of apparel.

Playing on ecological concerns, however, isn’t the only strategy being utilized to spark new
consumer demand. Equal emphasis is being placed on new niche lines that impart new and improved
high-tech properties to finished textile products. The preponderance of these products involve
man-made fibers and polymers — all aimed at providing the buyer with increased safety, comfort,
durability and convenience.

And while man-mades dominate here, natural fibers also are getting more attention. Cotton
researchers have come up with denims woven with S-twist yarns, rather than with conventional
Z-twist — something that offers an easy way to add subtle textural effects to garments.

Cotton people have also succeeded in coming up with 100-percent cotton stretch. For
consumers who generally prefer the natural fiber to man-mades, this new stretch fabric also
provides the added benefit to clothing that it is not degraded by either chlorine bleach or heat
from tumble drying or ironing.

Wool too, seems to be joining the trend toward fiber upgrading. One of the latest
developments here is a proprietary washable 100-percent wool line, dubbed Easy Wool™, aimed at the
men’s suit and trouser markets.

But as noted above, some of the really impressive innovations involve the more high-tech
fibers and fabrics. The goals here are varied — with individual offerings designed to enhance such
attributes as tensile strength and elongation, weight, elasticity, non-flammability, moisture
transport, durability and weatherability.

And the list goes on and on. Sun protection, for example, is getting a lot more attention
from the industry. Result: Specialty treated garments now boast of sun-protection factors of 30 and
50. Some of these offerings also are made with titanium dioxide fibers — the same material used in
sunblock lotions.

Then there are new self-sterilizing textiles. One researcher at North Carolina State
University has come up with light-activated fabrics that can stop pathogens in their tracks. They’r
e capable of eradicating 99.9 percent of viruses, as well as selected bacteria, in less than an
hour.

Also in the disease protection area are clothes designed to prevent Lyme disease. These
garments are infused with the insecticide permethryn, which makes this protection effective for
about 25 washings.

In a similar vein, there’s the unveiling of antimicrobial sheets and pillowcases. The big
plus here: They reportedly keep bedding both clean and smelling fresher.

And don’t forget nanotechnology, which is also becoming a heavy contributor to new textile
options. This approach is increasingly being used to change the behavior of fibers and fabrics by
incorporating many new performance characteristics such as stain resistance, moisture wicking,
antistatic and antimicrobial, among other properties. And all this is being accomplished without
changing the hand or other intrinsic properties of the material.

The military market isn’t being forgotten either. One of the latest innovations here: combat
uniforms that offer flame resistance and thermal protection from sudden heat caused by improvised
explosive devices.

And, last, but not least, there are the new electronic-age fabrics dubbed wearable
electronics or wearable computers. Features here include panels of buttons that sync to an iPod.
This approach is particularly applicable to sports coats and outerwear that are sturdy enough to
hide the technology while at the same time allowing it to function.

A Strategy For Survival

New and innovative fibers and fabrics are only part of the story when it comes to the
impressive number of moves being made to keep our domestic textile and apparel industries alive and
well. Equally important are the seemingly never-ending number of other approaches being developed
to loosen consumer purse strings. This applies to old-line traditional materials as well as some of
the newer ones. Upscale corduroy is a case in point, as new textures and finishes help make this
fabric an increasingly attractive alternative to denim in the lucrative denim market.

Then there are designer labels that are now in the forefront when it comes to pushing all
the new and inviting options. And by doing so, they help not only themselves, but also the entire
industry. They put increased emphasis on the new, the improved and the stylish. It’s their best bet
for surviving in today’s hotly competitive marketplace.

Not surprisingly, designer labels also are leaders in investing in research and development
to produce trendy new materials, fabrics and clothing. And again, this is something that benefits
the entire industry. Thus, just as a new fabric can put a fashion house on the cutting edge, the
mill that makes the basic fabric can gain a lot of credibility with its other customers.

The drive to establish better-quality products is also picking up momentum in the men’s suit
sector. The firms still in this business, such as Hickey Freeman and Joseph Abboud, are surviving
by concentrating on high-price, high-margin products that require a lot of time and handwork.

Another track being taken by remaining suit manufacturers: the upgrading of product
processes — with many companies investing in state-of-the-art, more flexible machinery and
production systems that can literally cut turnaround time in half.

Moreover, pushing for faster reaction times isn’t limited to men’s suits. JCPenney reports a
major reduction in its overall merchandise cycle times. The company says average times have been
reduced to 40 weeks — well under its original 50- to 52-week cycle. And the ultimate goal is for a
further reduction to only around 25 weeks.

All of the above does not exhaust the list of strategies being utilized to keep domestic
mills and manufacturers afloat. Take, for example, improved and more accurate labeling that is now
being employed to maintain and bolster market share — consumers are generally a lot more willing to
make a purchase when the label assures them that they’re getting what they pay for.

This idea is already being tested in top-of-the-line men’s suits, with new labels being
developed by the Cashmere and Camel Hair Manufacturers Institute’s Superfine Wool Council. More
attention is also being given to cashmere, where mislabeled quality has become a significant
problem.

The need to prevent deception also is getting increased attention in the import sphere. One
important step here: the expected negotiation of an anti-counterfeiting pact by Washington, the
European Union and six other trading partners. And it could well pay off, seeing that the US
Chamber of Commerce reports counterfeiting and piracy are robbing a huge $200 billion to $250
billion from the US economy. The hope is that China, a major source of these illegal actions, can
be convinced to join in this effort.

Meantime, the US government already has taken some preventive action on its own with regard
to the import cheating problem. New statistics show US seizures in 2006 were up 67 percent in
volume terms. While all types of merchandise are included in this number, research has shown that
much of this reflects Chinese-made garments. Specifically, the Chinese are exporting unbranded
apparel and other items from their factories with brand name logos being put on in small US
sweatshops.

In any case, US political pressure to restrain all this illegal activity can be expected to
intensify over the coming months. In part, this reflects our still-growing textile/apparel trade
deficit. Moreover, the fact that this is an election year is almost certain to intensify calls for
remedial action.

The industry’s safety concerns could be yet another factor to reckon with and even could be
used as a launching pad for improving demand. It’s no surprise that a growing number of mills are
beginning to think about this, especially in areas where dyes and other chemical additives are
starting to raise question marks.

Meantime, with similar worries in mind, the Consumer Product Safety Commission is showing a
lot more interest in the safety of textile and apparel products. A commission spokesman notes there
already is considerable concern about toxic chemicals — with Chinese blankets and clothing singled
out for special attention.

Summing Up

To sum up then, it looks like domestic textile and apparel makers will be facing a year of
innovations, challenges and uncertainties — and hence, a year that will bear especially close
monitoring. But even with this caveat, the industry is becoming increasingly optimistic that it
will survive and prosper.

And it’s a positive assessment that can now be backed up. Despite the import waves of recent
years, a hard-hit state like North Carolina notes that an impressive 1,600 of its textile and
apparel facilities have managed to survive and prosper. Another 800 of the state’s firms still use
textile products as components.

These upbeat results haven’t come easily. As one top textile executive puts it: “It’s taken
a lot of time, planning and hard work. But we believe we have finally turned the corner, and fully
expect to remain a major player in the global market for a long time to come.”